How much do you need in an ISA to generate a second income of £2,700 a month in 2050?

Nobody really knows how much inflation will erode purchasing power by 2050, but what’s certain is that a sizeable second income will still come in handy. And that would be especially true coming from a tax-free Stocks and Shares ISA.

Not paying tax on returns turbocharges the compounding process. Instead of the small yearly leaks of cash that would otherwise go to HMRC, it all stays in the portfolio to grow. And by keeping 100% of those dividends, then reinvesting them continuously, the ISA balance snowballs faster.

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Running the figures

Admittedly, 2050 sounds like some faraway year, a time when we’ll all be driving flying cars and having Tesla bots doing household chores. But it’s actually just under 24 years away, meaning we’re closer to 2050 than we are to the turn of the millennium in 2000.

To generate £2,700 a month in dividends by then, somebody could invest £425 a month, then increase that by 5% each year. In this scenario, the ISA would grow to just over £652,000 after 24 years.

This assumes a 9% average annual portfolio return is achieved, with all dividends reinvested along the way to really fuel compounding.

With a portfolio yield of 5%, the income here would be roughly £32,600 (or the equivalent of just over £2,700 per month).

Obviously these are just rough figures, and I haven’t included investing account charges or any trading fees (some platforms still charge per trade when buying and selling shares).

Also, a 9% return isn’t guaranteed, though I note it’s significantly less than the FTSE 100‘s total annualised return of about 14.5% over the past five years. And roughly 10% over the past decade.

Of course, two or three consecutive down years would quickly bring those annualised return figures down. The FTSE 100 has been on fire in recent times, but not always historically.

Powerful demonstration of wealth-building

These figures clearly demonstrate that disciplined investing over time can be really powerful. Even when starting from scratch.

Meanwhile, the contributions, even while growing 5% every year, would still be well within the current ISA annual allowance of £20,000. I appreciate not everyone can max out the full amount.

Investing in UK property

Turning to FTSE 100 dividend stocks, I think Londonmetric Property (LSE:LMP) is worth considering. This is an established real estate investment trust (REIT), with a 10-year track record of rising income.

What I like about this REIT is that it’s focused on areas that are enjoying strong long-term growth. It has 54% of its portfolio invested in urban logistics assets, particularly centred around e-commerce.

Given we’re spending more time shopping online, this area has both longevity and growth potential, which should support rising rental income.

There’s also a focus on healthcare and convenience, which obviously enjoy consistent demand. The top occupier is Ramsay Health Care, which is a private healthcare provider. The private sector is busy helping the NHS reduce its massive waiting lists.

Of course, if anything went wrong at Ramsay, then that could be an issue for Londonmetric. High interest rates also pose challenges for REITs because they naturally carry high levels of debt.

In terms of dividends, however, I like Londometric’s forecast 6% yield. I recently added it to my own income portfolio.

The post How much do you need in an ISA to generate a second income of £2,700 a month in 2050? appeared first on The Motley Fool UK.

More reading

• Owning 2,844 shares of this FTSE 100 firm could pay £351 in annual second income
• How to start building £15,204 lifetime passive income with just £50 a week
• £1,000 buys 481 shares in this fantastic FTSE 100 REIT
• Here’s a 5-stock portfolio that pays passive income every single month
• How much do you need to invest in REITs to quit work and live off dividends?

Ben McPoland has positions in LondonMetric Property Plc. The Motley Fool UK has recommended LondonMetric Property Plc and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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